What is it about?
This paper, prompted by an assertion by Milton Friedman to the contrary, is the first in economics to prove that extreme uncertainty does not necessarily call for more cautious monetary policy. Extreme uncertainty is described as Knightian, when the distributions underlying uncertainty is unknown or, equivalently, uniform. The minimax approach used in the paper later became known as robust control. The paper also derives optimal signal detection when the underlying distribution is unknown.
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Why is it important?
This paper is the first in economics to approach monetary policy under Knightian uncertainty and the first to prove that uncertainty does not necessarily produce increased caution.
Perspectives
I wrote this paper in 1981 when it received positive referee reports, one of which however, asked me to dwell on additional matters for which I did not have time. So it lay dormant until , in 2000, it caught the attention of Tom Sargent, prompting me to put it out as a Federal Reserve Working paper, where it received world-wide attention, for which I am grateful.
Peter von zur Muehlen
Federal Reserve Board
Read the Original
This page is a summary of: Activist vs. Non-Activist Monetary Policy: Optimal Rules Under Extreme Uncertainty, SSRN Electronic Journal, January 2001, Elsevier,
DOI: 10.2139/ssrn.2735777.
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